Allocation of Cost Savings in a Three-Level Supply Chain with Demand Information Sharing: A Cooperative-Game Approach

We analyze the problem of allocating cost savings from sharing demand information in a three-level supply chain with a manufacturer, a distributor and a retailer. To …nd a unique allocation scheme we use concepts from cooperative game theory. First, we compute analytically the expected cost incurred by the manufacturer and then use simulation to obtain expected costs for the distributor and the retailer. We construct a three-person cooperative game in characteristic-function form, and derive necessary conditions for the stability of each of …ve possible coalitions. To divide the cost savings between two members, or among three supply chain members, we use various allocation schemes. We present numerical analyses to investigate the impacts of demand autocorrelation coe¢ cient, , and the unit holding and shortage costs on the allocation scheme.